ARM: Raymond James Likes Server Prospects; FBR Sees Higher Royalties

By Tiernan Ray

Shares of ARM Holdings (ARMH) are down $1.44, or 3%, at $42.50, after the company today held its annual analyst day event in London, during which CEO Simon Segars discussed the company’s overall strategy for “gaining share” and CFO Tim Score provided a financial update, while other executives discussed the networking, server, and mobile markets for ARM’s chip technology.

Raymond James’s Hans Mosesmann, who has an Outperform rating on the shares, writing that the event was “well-attended,” noting that Segars said the three markets mentioned are each supposed to reach $20 billion in total chip sales by 2018.

Mosesmann finds his faith in ARM-based server chips reaffirmed by the company’s remarks:

Management indicated volume shipments of 64-bit ARM-based servers will start in 2H14, supporting commentary from AMCC (production orders for X-Gene as we speak), and AMD (Seattle chip should start to ramp in 4Q14). Design win activity in datacenter supports the view that the type of servers being deployed over the next several years are smaller and more efficient, as new architectures seek to balance CPU and I/O while maintaining scale-out characteristics. Management targets ARM server share of 10-15% by 2018, which we peg at ~25% of the datacenter server market – several times larger than the conventional wisdom of mid-single digit share.

Mosesmann urges investors to buy the stock while it is currently under pressure because of worries about the smartphone market:

ARMH shares have been under pressure YTD on concern over the sustainability of smartphone growth and perceived competitive pressure from Intel. We view current ARMH price levels as an opportunity for investors, as our number one takeaway from today’s investor meeting is that ARM technology will become increasingly pervasive in most areas of computing for years to come.

FBR & Co.’s Christopher Rolland reiterates an Outperform rating, and a $59 price target, writing that despite the lack of new forecasting, “The company also added language to its long-term guidance; it now believes operating expense growth will increase in line with license growth.”

He thinks the company stands to get rising royalty rates:

Interestingly, ARM did not reduce full-year royalty guidance (a growing point of debate), as it remained at ~19% YOY. Stepping back, we believe ARM has priced its technology inexpensively, effectively accelerating ecosystem growth to drive critical mass. In addition, as SoC complexity grows, ARM should be able to extract a higher royalty rate by providing technologies that quickly become the new “table stakes” for the industry (64-bit, big.LITTLE, and others).

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.